Family-run businesses are essential to the economic growth of any country. In several big economies, family businesses form the bedrock of the country. A BCG analysis suggests that family businesses form 48 to 74% of all manufacturing companies in Germany, India, and Indonesia. They create jobs, inject revenue, and generate value. In Germany, family-run businesses generate over $1.8 billion in revenue, around 49% of the country’s GDP. Such companies generate around $670 million in India (25% of the GDP) and $100 million in Indonesia (10% of the GDP).
One significant problem plaguing family businesses is inadequate and unstructured succession plans or even the lack of one altogether. Due to internal conflicts, and the lack of governance structures, the leadership transition is not smooth, with upcoming leaders being unprepared for the role. As a result, the business enterprise suffers. The Security and Exchange Board of India (SEBI) has taken many progressive measures to break the nexus between companies and their promoters. The new rule recommends companies have a non-executive director who is neither related to the Chief Executive Officer (CEO) nor the Managing Director. It is currently voluntary; however, SEBI plans to make it mandatory soon.
The company's focus should be on its growth rather than the interest of any particular stakeholders. Thus, it should have rigorous standards for corporate governance and an independent board of directors to protect the company from any conflicts. For instance, Crompton Greaves Consumer Electricals Ltd. has set a great example in identifying independent board members by relying on external search firms. Similarly, Marico Ltd. has set standards for the CEO’s performance metrics to smoothen the succession process. They invite potential successors to attend board meetings and understand the company's working culture. The objective is to break the dynastical cycle and find a successor that works for the company's betterment.
Good governance facilitates setting a fair, objective decision-making process and dispute settlement mechanism that focuses on the shared vision of success while depersonalizing any family disputes. It allows for the active involvement of external board members and experts committed to impartially, effectiveness and excellence. Depersonalizing business decisions eliminates any friction and awkwardness between family members who have divergent opinions. The decision-making lies in the hands of a group of experts and governing bodies rather than individual family members.
Most of the time, businesses are highly vulnerable during succession. This is because of the absence of a structured succession plan and appropriate tools to choose a suitable successor. Thus, a manual for good governance provides successors with the tools and advice they need to make a smooth succession. Good governance protects both the family and business by preserving a balance of power amongst various corporate bodies while furthering cooperation, making financially responsible endeavors, generating jobs, and ensuring the interest of all incumbent and future stakeholders.
Family members usually feel responsible for their company’s growth and success. Using governance tools allows them to communicate with others effectively, share ideas, interact and develop a harmonious sense of business ownership. These tools are designed to constantly remind family members to have a coherent shared vision and thus, mitigate any intense conflicts. Although conflicts cannot be entirely eliminated, developing a resolution and dispute settlement mechanism helps solve the conflict systematically, thus, preventing any prolonged familial disputes.
Board members make the most crucial decisions related to the company’s operations and working mechanisms. Thus, having a diverse, independent, expert board is essential for all family businesses. They should have an independent board of directors who are experts in their fields and can take responsibility for making informed decisions by bringing in their diverse ideas and valuable insights into the boardroom.
Effective governance policies and operations ensure the sustainability of a business. A business should be able to survive and thrive if no family member is in the leadership position or there is no one ready to become a successor. Good governance protocols and policies prepare businesses for these scenarios by defining the management roles.
As we discussed above, good governance is the key to the success and sustainability of a family business. Good governance is not limited to having a list of protocols and policies that family members need to follow. In fact, good governance needs to be ingrained in the company’s culture, goals, and working environment so that people organically work towards the same goal. The foundation stones of good governance for family business are respect, trust in family values, and appropriate integration. It is important to note that every family business is unique; thus, the good governance strategy should be tailored to meet the needs and goals of that business. Family members need to work together to develop and implement such a good governance strategy.